Introduction After works contract transactions were brought under sales tax laws by deeming fiction inserted by clause (29A) in Article 366 of the Constitution of India, the controversy has still continued about the nature of taxable works contract. The transaction becomes taxable works contract transaction, if there is transfer of property in goods, in the execution of works contract, from the contractor to the contractee. The issues are not very much debatable if the transfer of property in goods is apparent. Like, a building contractor may use cement and other building material for construction of a building for which a contract is awarded to him by the contractee. In this case, there is no debate as there is transfer of property in cement and other building material from the contractor to the contractee. It is very apparent and hence it becomes a taxable works contract. The issue arises when the fact towards transfer of property is not apparent and it has to be ascertained on peculiar facts of the case.
Nature of charges allowable as deduction for deciding taxable value of the contract The works contract, being a composite contract, the labour portion also referred to as ‘Service Component’, is required to be deducted from the total value of the contract to arrive at value of the goods transferred. The tax is leviable on such reduced portion. In Gannon Dunkerley & Co. v. State of Rajasthan, (88 STC 204), the Supreme Court, for deciding the value of goods involved in the execution of works contract on which sales tax can be levied, laid down as under:
“The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract;
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services; and
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.
The amounts deductible under these heads will have to be determined in the light of the facts of a particular case, on the basis of the material produced by the contractor.”
One of the items deductible from the contract value is value of consumables. Therefore, if the goods used are proved to be consumable items, then it will be allowed as deduction and if that is the only material used (which is allowed as consumables), then there will not be any transfer of property from contractor to contractee and the whole transaction will be out of scope of taxable works contract under sales tax laws. The issue is about meaning to be assigned to ‘consumables’.
Meaning of consumables Recently, the Full Bench of the Kerala High Court had an occasion to decide the above issue. The reference is to the judgment in case of M/s. Enviro Chemicals v. State of Kerala, (39 VST 434).
In this case, the dealer had used his chemicals for treatment of effluent water coming out of the factory of the contractee, who had awarded this contract to him. The process of treatment is narrated in the judgment as under:
“From the collection tank, the wastewater is pumped at a uniform rate to the flash mixer and subjected to chemical treatment. The chemical is a combination of ferrous sulphate, ferrous chloride and sulphuric acid. These chemicals are obtained by the petitioner from effluents discharge from Travancore Titanium Products. An addition of required dosage of lime is also added. The chemical mixture is named by the assessee as Envirofloc. Due to this, coagulation of the suspended particles and precipitation of dissolved organics take place. The solid particles settle at the bottom and the clear liquid overflows. The overflow from the Clariflocculator is taken to the aeration tank and subjected to activated sludge process. Oxygen is supplied by means of surface aerators.
The overflow from the aeration tank is sent to the hopper bottom settling tank. The outlet of the secondary settling tank is the treated effluent which is discharged to the river and it will be odourless. It will not contain chemicals or any pollutant.”
Considering that no property in the chemicals used is passed to the contractee, the plea of the appellant dealer was that there is no taxable works contract. It was argued that the chemicals used get consumed in the process and hence there is no transfer of property to the contractee so as to constitute taxable works contract under sales tax laws. As there were differing judgments, the issue was referred to the Larger Bench. The Larger Bench has decided the issue by majority.
The Larger Bench has relied upon the judgment of the Supreme Court in the case of Xerox Modicorp Ltd. v. State of Karnataka, (142 STC 209). In relation to ratio laid down by the Supreme Court in the above judgment, the High Court has observed as under:
“13. After having considered the entire case law cited before us and on a conspectus of the provisions, we would think that the learned Special Government Pleader is right in his contention based on the decision of the Apex Court in Xerox Modicorp Ltd.’s case 142 STC 209. It is no doubt true that the contract as such is not placed before us, if it is one which is reduced to writing. But we will proceed on the basis that the process involved is substantially the same as has been indicated by the assessee and which we have extracted. It is undoubtedly true that even after the 46th amendment, sales tax cannot be levied merely because there is a works contract. There must be transfer of property in the form of goods or otherwise than in the form of goods. What is taxable is the transfer of property in goods (See the definition of sale in the Act in this regard). It does not matter whether the transfer of property takes place in the form of goods or in any other form. It is undoubtedly also true that in view of the decision of the Apex Court in M/s. Gannon Dunkerley & Co. and Others v. State of Rajasthan and Others, [1993 (1) SCC 364] that the cost of consumables involved in works contract cannot be taxed.
14. That the chemical in question is goods, is beyond doubt. It cannot be disputed that the assessee was the owner of the goods in question, namely, the chemical. It is obviously the intention of the parties that the assessee must use the chemical in the effluent treatment process. It is equally indisputable that the assessee has actually used it. No doubt, in the judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka, [(2005) 142 STC 209], the Apex Court found that the toners and developers are liquids put into the xerox machine and they perform essentially the same function as ink in the printers and the Court also relied on the provision in the contract that the assessees in the said case would charge for the unaccounted stock at prevailing prices. By using the chemical, the petitioner/assessee rendered the effluent compliant with the standards. It could probably be said that in the case of the toner and developers as the function is that of ink in printers, it shows up in the final product of the xerox machines. But, the decision of the Apex Court is not based on there being any requirement that the items which are used should exist in any form in the resultant product, which is the principle laid down by this Court in Teaktex Processing Complex Limited v. State of Kerala, [(2004) 136 STC 435] and also in Microtrol Sterilisation Services Pvt. Ltd. v. State of Kerala, [(2009) 26 VST 213 (Ker.)].”
After referring to the above ratio, in relation to the facts of the dealer in this case, the High Court has observed as under:
“16. When the assessee has used it, will it remain the owner of the chemical any longer? Will not the property in the goods pass to the awarder? We would think that the moment the assessee pours the chemicals into the effluent, he will cease to be the owner and at that point of time the awarder must be deemed to have taken delivery of the same. In our view the fact that upon it being poured into the effluent, it loses its identity and that it is consumed will not detract from the fact that there is delivery of the same to the awarder. The assessee does not have a case that the effluent belongs to the assessee. We do not think that it can be their case that the effluent does not belong to the awarder. Let us pose a question, if a complaint by a third party is raised about the treated effluent, can the awarder absolve itself of the ownership of the same? We would think, it may not be possible. Therefore we would be justified in holding that the effluent and the treated effluent both belonged to the awarder. It is, therefore, into the property of the awarder, namely, the effluent that the assessee supplies the chemical. The Apex Court in its decision in Gannon Dunkerley & Co. v. State of Rajasthan & Others, [(1993) 1 SCC 364] had, inter alia, held that cost of consumables, such as water, electricity, fuel, etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract, is to be deducted. In section 5C also, the words “not involving any transfer of property in goods” have been incorporated. Just like the toner and developer having been put into xerox machine becoming the property of the customer in the case before the Apex Court in Xerox Modicorp Ltd. case and the sale taking place before the goods are consumed, in the same way, the property in the chemical passed to the awarder the moment they are put into the effluent by the assessee and its subsequent consumption is the consumption after sale and it does not detract from the factum of sale and consequently the exigibility to tax becomes unquestionable.”
Conclusion
The above judgment throws new dimension to the concept of consumables. It appears that if the goods used are consumed without involving into the actual execution, then it will be deductible as consumable. Like, fuel, which is used for running the machinery with which contract may be executed. The fuel is not getting directly involved in the works contract. However, if the goods used directly take part in the contract and which directly or indirectly interact with the materials of the party, then even if they ultimately get consumed, it will be consumable for the contractee, but for the contractor it may amount to transfer of property to the contractee, whereby he will be considered as liable to works contract. It may however be noted that the dissenting Judge has accepted the argument of the dealer that since there is no transfer of property to contractee, there is no taxable works contract. However by majority the transaction is held as taxable. The judgment will have a very substantial impact in the matter of interpretation of nature of taxable works contract.
